The Burden of Labor Burden

The Burden of Labor Burden

When you outsource a service, you are largely outsourcing labor costs. Yet, many labor costs rarely get a close look, but affect the price of the service. Take for example, labor burden (payroll taxes). I have priced or reviewed pricing on hundreds of opportunities. We always accept the published labor burden for a given state. Rarely have I questioned labor burden taxes like SUTA and FUTA (State Unemployment Tax Act and Federal Unemployment Tax Act respectively).  I’ve assumed away the details of these costs with a paradigm that they are mandatory. Why?  A good question—it’s as if their governmental acronymization gives SUTA and FUTA an official hall pass that enables a sort of perpetual hall wandering allowing them to escape close review. We think of them as mandatory taxes, which we have no control over. The truth is that we do have control.

When a prospective customer questioned our SUTA and FUTA rates, I did some research that became the impetus for this post. Here is how you have control over SUTA. Look for another post for how to control FUTA rates.

Understanding SUTA

To be able to control your SUTA rates, you have to understand how the tax is calculated. There are two components: (1) Your assigned rate multiplied by your (2) paid wages that are subject to SUTA taxation.

#1: Assigned SUTA Rates

Assigned SUTA rates are determined for individual companies. I had assumed they were the same for all companies. They are different for a couple of reasons:

  1. First, the tax is intended to be “experienced” based so that your SUTA rates rise and lower according to how many unemployment claims have been filed against your company.  Companies with higher claim rates are assigned a higher rate and lower claims mean a lower rate. Some industries are subject to higher rates given the higher turnover associated with the industry (e.g. Janitorial Service Companies, Construction Services, Handyman Services, etc.).
  2. Second, each State varies in the amount time they consider since the claim was made as what your company’s contribution will be.

 #2: SUTA Subject Wages

The second component of the SUTA tax is amount of wages paid and number of employees your provider has in the State. SUTA taxes are charges to each employee for each year up to a maximum value referred to as the “Cut-off Value” or “State Wage Base”. Each State varies in what the “Cut-off” value is. Once an employee’s wage exceeds the cut-off value, earnings for the employee are not included in the calculation.

Minimum and Maximum Ratings

Each state has a minimum and maximum rate. These rates are typically published by each State’s labor department or related agency. Each State typically publishes the minimum and maximum rates on their websites. A quick search using the term [“desired State” SUTA Rates] yields the best result.

New Employer Rates

Each state also has a new employer rate. Some states charge lower initial rates to entice businesses to operate in their State. However, they vary from as low as zero percent to upwards of four percent.

How to Control SUTA Rates

So how do you control SUTA rates or better asked, how do you know your facility service provider (such as your commercial cleaning company) is achieving the best rates—rates they pass on to you? Your facility service company can do three things:

  1. Lower Turnover. They have to reduce turnover and terminations that result in unemployment claims. Every time a company terminates an employee and that employee files a claim for unemployment benefits, it becomes a part of the experience calculation, which can cause your facility service provider’s SUTA rate  rise unless the provider is already at the maximum rate.
  2. Improve HR Practices. They have to exercise sound HR practices. For example, they must conduct regular and consistent performance evaluations and document all terminations.  Many unemployment claims are contestable. However, without written documentation that the termination was with cause, most workforce boards will approve the claim.
  3. Challenge Unemployment Claims. Active claim management is critical to ensuring questionable claims do not get approved and contribute to increases in the SUTA rate.

Contracting with janitorial companies, maintenance companies or construction companies that manage their labor burden should result in lower burden costs, which affects your price for the service. Labor burden can up be as much as 14% of your total cost in outsourcing to a facility service provider.  If you could lower that cost by 5%, think of savings you would incur (50,000 on a million dollar/year account).

It is time to take away the hall pass given to labor burden costs.

Marc Collings

Senior VP of Sales and Marketing at Varsity Facility Services
Marc Collings is Varsity's Vice President of Marketing for Varsity Facility Services. Marc oversees the company's growth, branding, positioning, customer support and analytics. In this role, he has positioned the company as a customer solutions leader for lowering cost and improving quality. He also led the company-wide rebranding and strategically positioned the company as a sustainability leader, serving on a committee for the EPA, obtaining the Ashkin Group award for sustainable leadership, leading Varsity's CIMS Green Building certification with honors, and developing Varsity's S.H.A.P.E. sustainability strategy, which improves service results along five dimensions: Safety, Health, Asset Preservation, Productivity and the Environment.

In 2011, Marc's team won the large company category, "Best in the Industry" marketing materials from the Building Service Contractor Association International (BSCAI). Marc also directs Varsity's proposal writing, sales process and tools development, marketing campaigns, corporate website SEO performance and customer support center.

Marc has spent his career developing strategic capabilities that enhance value to customers and the company. A Lean Sigma Green belt himself, he developed the company's Lean Sigma offering, providing an innovative solution to customers' need to lower cost while raising quality. He led the development of JanOPS, an industry-leading janitorial operating system, which brings standardization and service consistency to large campus and geographically disperse national accounts.

Prior to this position, Marc was responsible for strategic management at Varsity. He has initiated or directed multiple strategic technology initiatives, ranging from a corporate website, a corporate intranet, a web/smartphone based quality control system, a learning management system, a corporate content manager and knowledge wiki, deployment and customization, and an Android app which facilitates the GROW sales process he has developed.

Marc is the author of several leadership and management training manuals, field guides, marketing collateral and case studies. He speaks Portuguese and Spanish and holds a bachelor degree in English/Technical Writing and a Masters of Business Administration in Finance from Idaho State University. Marc enjoys mountain biking, skiing, fishing and golf. He is happily married, and he and his wife Victoria enjoy raising and spending time with their four children.

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